Whether we are referring to low-liquidity markets such as cryptocurrencies, more liquid ones such as certain Chinese assets and even ultra-liquid markets like the S&P 500 or foreign exchange pairs, discussions or better stated controversies surrounding the manipulation of the asset(s) in question abound, usually manipulation involving either one extremely well-funded entity (or “whale”) or several entities colluding.
A few obvious questions arise, such as:
- Are low-liquidity markets manipulated?
- Are high(er)-liquidity markets manipulated?
- Are Chinese asset prices manipulated?
In our view, the answer to all three of the above questions is a resounding yes, but this doesn’t mean it is time to put our tin foil hats on and become conspiracy enthusiasts. Not at all. Market manipulation in one way or another has taken place since… well, since we have had markets. Whenever there is money involved and well-funded entities exist that can put their sheer size to good use, history makes it clear that they tend to do exactly that.
Sometimes they play by the book and their “manipulation” is simply an unavoidable function of their sheer size, sometimes they operate in grey areas and sometimes, yes, even large-scale international scandals such as the Libor (London Interbank Offered Rate) one end up surfacing.
As a general rule: the less liquidity there is (and yes, it is true that certain Chinese assets don’t exactly excel from a liquidity perspective, especially compared to let’s say US stocks), the easier it tends to be for proverbial whales to manipulate prices, with there being several advantages associated with this practice, advantages such as:
- Placing huge market buys so as to generate impressive short-term price hikes, hoping that they will incite panic buying, with other investors scrambling to “get in while they still can” due to FOMO (Fear Of Missing Out), while the initial whale plans its exit amidst all that euphoria/greed
- Placing huge market sell orders so as to generate impressive short-term price crashes, hoping that they will incite panic selling, with other investors scrambling to “get out while they still can” while the initial whale plans its re-entry amidst all that fear
- Generally speaking, influencing short-term price charts to such a degree that they end up proverbially painting the tape, in an effort to make other investors believe whichever technical narrative they intend to push
- Setting up buy and sell walls, in an effort to keep prices from rising and/or crashing uncontrollably
As can be seen, whales do tend to have quite a few tricks up their sleeves and this makes many market participants eager to consider them invincible. Are they correct in that assessment? And if so, should everyone else simply pack it up and move on to greener and less manipulated pastures? In the opinion of the ChinaFund.com team, the answer is most definitely negative.
Simply because, and we cannot stress this enough: whales are market participants just like everyone else.
Larger market participants? Yes.
Market participants with an edge? Oftentimes, yes.
But perfect? Definitely not!
To illustrate this, here are a few of the most obvious disadvantage associated with being a whale, whether you invest in Chinese assets, more liquid markets or less liquid ones:
- You are oftentimes too large of an entity for your own good. A smaller investor who smells that something is wrong can quickly exit the market without other market participants noticing, in light of the fact that his or her position sizes are but a drop in the bucket compared to larger players. Whales do not have this luxury. On the contrary, when a whale decides to exit… let’s just say everyone else will know
- Not possessing crystal balls. Time and time again, whales who manage to manipulate prices short-term end up losing money due to the fact that they didn’t position themselves properly with the respect to the longer timeframe trend. In other words, it is multiple orders of magnitude more difficult to influence longer-term “big picture” price action than it is to influence short-term price action
- Being under continuous scrutiny, essentially hated by other market participants as well as in many cases the authorities (something that risks being extremely problematic in less predictable jurisdictions such as China), with the tricky consequences this can bring about
… the list could go on and on.
The bottom line is this: as a small player who invests in Chinese assets or any other asset class for that matter, there are pros (for example being able to operate in let’s call it stealth mode) as well as cons (not being able to influence prices through your small position size) but the exact same principle applies to whales.
Of course, the pros and cons differ for whales compared to smaller market participants but that is precisely the conclusion we want to get across: just because the cons differ, it doesn’t mean there are none whatsoever associated with being a whale. At the end of the day, in China as well as elsewhere, it is yet another “pick your poison” situation which revolves around a wide range of different market participants (in terms of sheer size, in terms of strategy, in terms of time horizon and so on) trading among one another.
Is this a perfect equation? No, it can oftentimes seem downright chaotic.
But, thus far at least, history makes quite a compelling case that it’s the best approach we have. Which is why, among other things, even the (in)famous socialism with Chinese characteristics itself (a topic covered through a dedicated article which can be accessed by clicking HERE) revolves around accepting certain free market elements. Therefore, the ChinaFund.com team suggests focusing less on conspiracy theories surrounding whales and more on strategies on how to out-perform them, something we will gladly be of assistance with.